20260327-招银国际-ZHOSHK_Silver_linings_of_the_weak_FY25_4页_576kb

CMBI Credit Commentary Summary

Core Content

This document is a credit commentary on Zhongsheng Auto Group (ZHOSHK), focusing on its financial performance, credit risk, and investment outlook. The commentary highlights the market overreaction to a profit warning and reaffirms a "buy" recommendation on its bond ZHOSHK 5.98 01/30/28. It also outlines the company's financial position, operational improvements, and future growth strategies, particularly in the EV sector.

Main Points

1. Market Reaction to Profit Warning

• Zhongsheng's FY25 results were weak, but the market overreacted.
• The bond ZHOSHK 5.98 01/30/28 dropped by 6.5 points and credit spread widened to 362bps after the profit warning.
• The bond has since recovered 2.9 points, currently trading at 96.0, with a YTM of 8.4%.

2. Financial Performance and Operating Metrics

• New car sales volume increased in FY25 by 2.5% to 497,316 units, with a 17% rise in 2H25.
• Gross loss margin for new car sales increased to 2.9% in FY25 from 2.6% in FY24.
• Commission income dropped 38.7% to RMB2.6bn due to the termination of "high interest, high rebate" financing.
• Impairment losses totaled RMB2.3bn in FY25 from store network realignment and asset disposals.

3. Positive Outlook and Strategic Adjustments

• Zhongsheng aims to achieve breakeven in new car sales gross profit by FY26.
• Traditional OEMs like BMW, Mercedes Benz, and Audi reduced MSRP by 10-25%, which should help lower COGS and improve gross margins.
• The company plans to double its EV store count in FY26 and exit 50-150 underperforming stores.

4. Liquidity and Net Debt Profile

• Zhongsheng has maintained a positive FCF and reduced net debt from RMB17.155bn in FY23 to RMB14.220bn in FY25.
• The cash/ST debts ratio is at 1.2x, indicating sufficient liquidity.
• The company has repaid its CB due May'25 and early-redeemed ZHOSHK 3 01/13/26, totaling cUSD630mn.

5. Future Financial Projections

• Expected improvements in key coverage ratios.
• Assuming breakeven gross margin for new car sales by 2028 and annual capex of RMB3bn, net debt/EBITDA and EBITDA/int are projected to improve to below 2.5x and above 5x, respectively.

Key Information

Bond Details

• Ticker: ZHOSHK 5.98 01/30/28
• Size: USD 600.0mn
• Outstanding (O/S): USD 600.0mn
• Coupon: 6.0%
• Maturity: 1/30/2028
• Offer Price: 97.0
• Z-Spread: 378bps
• YTM: 8.4%

Financial Highlights

• FCF: RMB5,884mn in FY25
• Net Debt: RMB14.220bn in FY25
• Debt/EBITDA: 7.6x in FY25
• Net Debt/EBITDA: 3.1x in FY25
• EBITDA/Interest: 2.8x in FY25

Store Network and EV Expansion

• EV store count increased from 20 in Dec'24 to 40 in Dec'25.
• EV sales accounted for 8.2% of total sales in FY25.
• The company plans to expand into EV brands such as Geely and double EV store count in FY26.

Conclusion

Despite the weak FY25 results, the commentary maintains a "buy" stance on ZHOSHK 5.98 01/30/28, citing the company's positive FCF generation, net debt reduction, and strategic focus on EV growth. The market is expected to price in a multi-notch downgrade, but the bond is viewed as offering a favorable risk-return profile based on improved operating performance and liquidity.

Disclaimer

• This report is for informational purposes only and does not constitute investment advice.
• The information is based on publicly available data and may not be accurate or complete.
• CMBIGM is not liable for any loss or damage resulting from reliance on this information.
• The report is subject to change and is intended for specific recipients only.